Oracle Corp., the largest maker of database software, agreed to pay $2 million to settle claims by the U.S. Securities and Exchange Commission that it violated the Foreign Corrupt Practices Act.
The company failed to prevent a subsidiary from secretly setting aside money off the company’s books that was used to make unauthorized payments to phony vendors in India, the SEC said in a statement.
“Through its subsidiary’s use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use,” Marc Fagel, Director of the SEC’s San Francisco office, said in the statement.
Employees of the subsidiary, Oracle India Private Ltd., set up transactions with India’s government in a way that let distributors hold about $2.2 million in proceeds in unauthorized side funds, the SEC said. The employees then directed the distributors to make payments from the funds to purported vendors, several of which were storefronts that didn’t provide any services to Oracle, according to the statement.
Oracle’s subsidiary documented certain payments with fake invoices, the SEC said. Oracle agreed to the settlement without admitting or denying the allegations.
The practices were carried out from 2005 to 2007, according to the SEC, which cited a complaint filed in U.S. District Court for the Northern District of California.
The database provider discovered in 2007 that a few employees in India “directed distributors to maintain side funds in violation of Oracle business practices,” said Deborah Hellinger, a spokeswoman for Redwood City, California-based Oracle. The workers were fired after an investigation, she said.
“Oracle has established policies, programs and controls to deter and detect inappropriate conduct that have been recognized among the best in our industry,” Hellinger said. “We will continue to maintain a high standard of compliance and accountability.”
According to the SEC’s complaint, Oracle India employees created “extra” profit margins 14 times across eight contracts, between the price distributors paid for its products and the price end customers paid. The money was used to create side funds to pay parties that weren’t Oracle vendors.
“Because the Oracle India employees concealed the existence of the side fund,” the company didn’t properly account for the money, the SEC said. “Oracle India’s parked funds created a risk that they potentially could be used for illicit means, such as bribery or embezzlement.”
One example was a $3.9 million deal with India’s Ministry of Information Technology and Communications in 2006. Oracle booked $2.1 million in revenue from the contract from its distributor. Two months later, an Oracle India employee invoiced the distributor eight times for amounts ranging from about $110,000 to $396,000 for payments to third party vendors, the complaint said.
“These invoices were later found to be fake,” the complaint said.
Other large technology companies have dealt with similar investigations in recent years.
International Business Machines Corp. last year agreed to pay $10 million to settle charges that it violated the FCPA by paying bribes to officials in South Korea and China. In 2010, the U.S. Justice Department and SEC joined a probe by German prosecutors as to whether Hewlett-Packard Co. employees engaged in bribery, embezzlement and tax evasion in Russia.